Occupational specialization, skills, and urban wage premium in Brazil

We set out to verify how local occupational specialization, according to different categories of workers’ skills (cognitive, social, and manual), can impact the individual wage differential in Brazil. We estimate the effects of occupational specialization by skills from the wage equation using instrumental variables and worker and firm characteristics. The main contribution of the study is to decompose the effects of specialization of skills in relation to urban conditions, such as population density. We rely on individual microdata for Brazil for the period 2009–2018. We found a wage premium for cognitive and social specializations, benefitting workers in occupations that are intensive in these skills. The results of the specialization wage premium, with the control of the endogeneity of the local choice, indicated that the Ordinary Least Squares estimates were underestimated. In the decomposition analysis, density negatively affected wage premiums for cognitive and social specializations. The results suggest that the negative effect of competition in denser labor markets can offset the positive interaction externalities. When controlling for worker and firm fixed effects, density no longer affects the specialization wage premium. This result suggests that worker-firm matching is more relevant than density in explaining occupational specialization wage premiums. The results for Brazil indicate the importance of policies that promote the quality of worker-firm matching.